DEFINITION of 'Hearsay'

Hearsay is testimony given during a trial that is not based on what the witness has directly seen, but instead on what the witness was told by others. Hearsay evidence is a weak source of evidence, and is often prohibited in court.

BREAKING DOWN 'Hearsay'

During a trial, the plaintiff (or prosecution) and defendant present evidence that they believe provide credence to their side of the case or discredit the other side. They may also have witnesses testify in court about what they know about certain aspects of the case, such as the nature of a business arrangement or the timeline of events.

Hearsay is considered an out-of-court statement. This is because the witness providing hearsay evidence is repeating what he or she heard or read, and did not witness the events in question directly. For example, a witness may testify that he heard that a business owner was selling counterfeit goods. The individual who made the claim that the witness refers to is not the one providing testimony in court. The witness providing hearsay has sworn to tell the truth, but the individual whose statements the witness is basing his or her testimony on has not been sworn in. For this reason, judges generally prohibit hearsay in court.

Credibility of Hearsay

The credibility of hearsay evidence is dependent on how trustworthy the original source of the information is. Since the witness is repeating what he or she was told by another party, the witness’ credibility has reduced significance. Attorneys will seek to discredit the original source of the information, as well as the credibility of the witness.

While hearsay is generally prohibited from being allowed in court, judges may make exceptions to this rule. Examples of exceptions include when the person who made the declaration is unavailable to appear in court (declarant unavailable), or if making the statement would otherwise go against the interests of the declarant (statement of interest). An example of a statement of interest is an accountant telling a friend that he thinks his boss is skimming money from the company.

Hearsay evidence can make convictions in insider trading and other white collar crime cases difficult to obtain. Stock transaction records and bank statements are generally considered substantive types of evidence, but witness testimony concerning verbal communications that the defendant may have had with other parties may become unusable under intense scrutiny. In some cases, little hard evidence is available to the prosecution, but recorded conversations from wiretaps may serve as the best evidence that the prosecution has. This situation may arise when someone passes insider information to a friend without the expectation of payment, as passing this information along won’t be reflected in any of his or her financial records.

For example, in United States v. Sean Stewart, the defendant was convicted of providing inside information to his father. The prosecution’s case relied on a recording of a discussion the defendant’s father had with a friend, which would generally be considered hearsay unless the father were to testify in court that he made that statement. The judge, however, considered the father’s statement to fall under the statement of interest exception to hearsay evidence.

RELATED TERMS
  1. Deposition

    A deposition is testimony made under oath and taken down in writing ...
  2. Tax Court

    Tax court is a specialized court of law that hears tax-related ...
  3. Stare Decisis

    Stare decisis is a legal principle which dictates that courts ...
  4. Probable Cause

    Probable cause is a requirement in criminal law that must be ...
  5. Personal Financial Statement

    A personal financial statement is a document or spreadsheet outlining ...
  6. Income Statement

    An income statement is one of the three major financial statements ...
Related Articles
  1. Investing

    12 things you need to know about financial statements

    Before investing, discover 12 characteristics of financial statements that can help you evaluate companies and increase your chances of choosing a winner.
  2. Investing

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  3. Personal Finance

    The Myth of Friendly Financial Advice

    Free financial advice from family, friends and colleagues is often only worth what you pay for it.
  4. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
  5. Investing

    Why Financial Statements Are Harder to Read Than Ever Before

    Understand four major reasons that financial statements published in 2016 are more complicated and difficult to read than they were in the past.
  6. Investing

    What are Financial Statement Assertions?

    Understand financial statement assertions and what they mean in accounting. For investors, it is important that assertions be accurate.
  7. Insights

    New Evidence Trump Didn't Pay Taxes

    If the presumptive GOP nominee keeps hiding his returns, Congress could force him to show his hand with a one-line amendment to the tax code.
  8. Insights

    Should Insider Trading Be Legal?

    Insider trading has become a hot-button issue. Here are some of the pros and cons to making it legal.
  9. Insights

    The 3 Biggest Penalties for Insider Trading in the U.S.

    The three large penalties for insider trading in the United States have been handed down in recent years, leading to civil and criminal charges for the culprits.
RELATED FAQS
  1. What is the difference between a compiled and a certified financial statement?

    All publicly-traded companies are required to provide financial statements, including a balance sheet, cash flow statement ... Read Answer >>
  2. What is the difference between a cash flow statement and an income statement?

    Learn how a cash flow statement measures the sources and uses of a company's cash, while an income statement measures a company's ... Read Answer >>
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center